Reference no: EM132073516
Question: The Reuth Corporation plans to issue $20,000,000 of 10-year bonds at par next June, with semiannual interest payments. The company's current cost of debt is 11% . However, the firm's financial manager is concerned that interest rates will increase in coming months, and has decided to take a short position in U. S. government t-bond futures. See the settlement data below for t-bond futures. (Note: One standard futures contract is $100,000)
a. Calculate the present value of the corporate bonds if rates increase by 2 percentage points.
b. Calculate the gain or loss on the corporate bond position.
c. Calculate the number of futures contracts required to cover the bond position. Then calculate the current value of the futures position (round up to next whole number).
d. Calculate the implied interest rate based on the current value of the futures position.
e. Interest rates increase as expected, by 2 percentage points. Calculate the present value of the futures position based on the rate calculated above plus the 2 points.
f. Calculate the gain or loss on the futures position.
g. Calculate the overall net gain or loss.
h. Is the company hedging or speculating? Why? Which is riskier? Why?
Delivery Month
|
Open
|
High
|
Low
|
Settle
|
Change
|
Open Interest
|
(1)
|
(2)
|
(3)
|
(4)
|
(5)
|
(6)
|
(7)
|
Dec
|
97'28
|
99'17
|
98'22
|
99'17
|
+5
|
387,255
|
Mar
|
98'03
|
98'21
|
97'23
|
98'01
|
+12
|
90,353
|
June
|
98'13
|
98'27
|
97'01
|
97'12
|
+7
|
9,802
|
Formula for calculating the debt-assets ratio
: Based on the above figures and the formula for calculating the debt-assets ratio found on the Help screen for p. 5 of the Footwear Industry Report
|
What is your interpretation of the company revenues
: What information do you think that you might have access to, as a manager of the firm, that an outsider would not? What is your interpretation of the company's?
|
Arbitrage trade-profit using the price you were quoted
: What is the correct theoretical futures price? What is the arbitrage trade/profit using the price you were quoted?
|
Solve the differential equation
: Solve the differential equation y' = x + y
|
Calculate the present value of the corporate bonds
: The Reuth Corporation plans to issue $20,000,000 of 10-year bonds at par next June, with semiannual interest payments. The company's current cost of debt.
|
What is the proportion invested in each of two risky funds
: What is the standard deviation of your portfolio? What is the proportion invested in each of the two risky funds?
|
Describe three advantages of green it
: With a focus on enterprise hardware, software, services, and human capital, list and describe three advantages of green IT.
|
What is the cash flow from disposal
: Reversing Rapids Co. purchases an asset for $106,558. This asset qualifies as a five-year recovery asset under MACRS. The five-year expense percentages.
|
Relationship between concept of net present and shareholder
: What is the relationship between the concept of net present and shareholder with maximization?
|